In this Q&A, Stephen Richardson, WorldGBC’s Technical Lead for Energy Efficiency Mortgages, discusses the principles of green mortgages and why their roll-out will be key to improving building energy efficiency and meeting climate change targets.
What is a green mortgage?
Under a green mortgage, a bank or mortgage lender offers a house buyer preferential terms if they can demonstrate that the property for which they are borrowing meets certain environmental standards. This could perhaps be a new build home with an existing sustainability rating, or where the borrower will commit to invest in renovating an existing building to improve its environmental performance. In other words, a green mortgage is a mortgage specifically targeted at green buildings.
As an incentive for the borrower to either buy a green building or to renovate an existing one to make it greener, the bank would offer them either a lower interest rate or an increased loan amount.
The idea for green mortgages came up a lot during our BUILD UPON project, which supported governments across Europe to establish strategies to renovate the region’s existing buildings, and so we were delighted that the European Mortgage Federation (EMF) had similar ideas. Together with RICS, our regional partner E.ON, and some of Europe’s leading universities, we have received EU funding to create a road map to establishing a European green mortgages under the EeMAP initiative.
How do you define the ‘green’ in a green mortgage, and why are lenders interested?
In our work on EeMAP, the definition of green needs to be aligned with the underlying business case for lenders to offer green mortgages. For banks, this is about reducing risk. There is growing evidence which suggests green buildings (and their occupants) represent a lower risk investment for banks because:
1. Green buildings should cost less to run due to decreased utility bills, meaning the borrower is in a better financial position to be able to repay their loan, thereby reducing what banks call the ‘probability of default’.
2. Green buildings are thought to have an increased value – known as ‘green value’, compared to an equivalent property without any green credentials – or be more resilient to any ‘brown discount’ in markets where less green properties are becoming increasingly unattractive. These two effects are expected to increase over time, which is an especially important consideration as mortgages often have 25 or 30 year repayment terms. Maximising green value and avoiding future brown discount makes sense for a lender wanting to reduce the risks associated with its loans. If the ‘loan to value’ ratio picture looks healthier, this may also justify lending larger amounts to green buildings versus ‘brown’ buildings.
Why do green mortgages have the potential to revolutionise energy efficiency within homes?
Buildings consume lots of energy, and in Europe, the majority of buildings that we will be using in 2050 are already built. There is an urgent need to increase the current rate of energy efficient building renovation from 1 to 3 per cent per year, to meet climate change targets set out in the Paris Agreement.
A green mortgage offers a way of unlocking additional finance for renovation from the private sector; bringing a whole new group of stakeholders into the campaign for green buildings – mortgage banks.
It also puts the topic of energy efficiency and sustainability front of mind for the building owner at an important stage in the building’s life, when typically decisions about property renovations may be made. Research by the Energy Saving Trust in the UK suggests that the majority of major renovations are carried out within the first year of ownership.
What are the barriers to green mortgages?
There are numerous technical and social barriers that need to be overcome before green mortgages become commonplace.
The recent LENDERS project report from the UK Green Building Council highlighted that current mortgage affordability calculations in the UK take no account of energy performance. Banks have more work to do in understanding green buildings and developing enough data to prove that ‘green’ really does mean lower risk.
From the borrower’s perspective, focusing solely on the business case is not enough. Despite good financial payback on a range of energy efficiency measures, many home owners aren’t willing to invest. The green mortgage concept needs a better marketing strategy if it’s to be successful. Our regional partner E.ON, one of Europe’s leading green utilities, is leading on an important piece of customer insight research as part of EeMAP to overcome this. The question is how do we make a green renovation as common (and attractive) as an extension or new kitchen when someone is buying or remortgaging a home?
Do banks and mortgage lenders support green mortgages?
Yes, although it’s a mixed picture. Green mortgages do already exist in some countries and the EMF has a group of around 20 leading banks and financial institutions actively engaged in the finance workstream of the EaMAP initiative. However, many have said they are waiting to see if there is a willingness from financial regulators to improve the ‘capital treatment’ of green mortgage debt (meaning banks can lend more overall if they can prove the significant amount of mortgage debt they hold is lower risk).
How are Green Building Councils playing an influential role in the EeMAP project?
WorldGBC’s Europe Regional Network of Green Building Councils will lead the work on how energy and environmental performance is defined and assessed in a green mortgage at European level. These GBCs have started to do a detailed analysis of what a green mortgage could look like in their own markets, and will be meeting during 2017 to develop initial recommendations for how a Europe-wide product could work.
GBCs will be hosting a series of roundtables with experts in early 2018 to stress-test initial recommendations, and ultimately, the recommendations we develop will be used to start a pilot by the banks in summer 2018. The aim of this pilot phase is to produce the data the banks need to prove the lower risk profile of green loans – the vital first step on the way towards a mass market for green mortgages.
When could green mortgages be available for housebuyers?
As mentioned above, some already are! But hopefully when the pilot phase of the EeMAP project begins next summer, that number will start to increase. If we’re successful in proving the link between green performance and financial performance, then we hope many more consumers across Europe consider greening their homes alongside more usual home improvements. As with any transition, there’s likely to be a big time gap between early adopters and the rest of the market so it may be a few years before we see mass market penetration. Yet once we do, the potential is huge.
Which European GBCs are involved in the project?
The following Established GBCs are our national partners in the project:
- Croatia GBC
- DGNB (Germany)
- Dutch GBC
- Finland GBC
- France GBC Association HQE
- GBC Espana
- GBC Italia
- Irish GBC
- Polish GBC
Find out more about the work of our Europe Regional Network.